c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Learning Objectives
1.
Describe cost accounting systems used by
manufacturing businesses.
2.
Describe and illustrate a job order cost
accounting system.
3.
Describe the use of job order cost information
for decision making.
4.
Describe the flow of costs for a service
business that uses a job order cost accounting
system.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Cost Accounting Systems Overview
o Cost accounting systems measure, record, and
report product costs. The two main types of
cost accounting systems for manufacturing are:
 Job order cost systems
 Process cost systems
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Cost Accounting Systems Overview
o
A job order cost system provides product
costs for each quantity of product that is
manufactured.
o
Each quantity of product that is manufactured
is called a job.
o
Manufacturers that use a job order cost system
are sometimes called job shops.
o
Examples: an apparel manufacturer, such as
Levi Strauss & Co, or a guitar manufacturer
like Washburn Guitars
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Cost Accounting Systems Overview
o A process cost system provides product costs
for each manufacturing department or
process.
o Process cost systems are often used by
companies that manufacture units of a product
that are indistinguishable from each other and
are manufactured using a continuous
production process.
o Examples: Oil refineries, paper producers,
chemical processers, and food processors.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
JOB ORDER COST
SYSTEM FOR
MANUFACTURING
JOB ORDER COST
SYSTEM FOR
MANUFACTURING
Materials
o
The materials account in the general ledger is
a controlling account. A separate account for
each type of material is maintained in a
subsidiary materials ledger.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Materials
o The receiving report and the invoice are used
to record the receipt of the merchandise and to
control the payment for purchased items.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
MATERIALS
a.
To Materials Requisitions
To Materials Requisitions
(continued)
MATERIALS
From Materials Ledger Account
b.
b.
b.
b.
Materials
o A receiving report is prepared when materials
that have been ordered are received and
inspected.
750 units of
No. 8 Maple
Wood
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Materials
o If there are no discrepancies, a journal entry is
made to record the purchase.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Materials
o
The storeroom releases materials to use in
manufacturing when a materials requisition is
received. A materials requisition for Job No. 71
is shown below.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Materials
o
For direct materials, the quantities and
amounts from the materials requisitions are
posted to job cost sheets. Job cost sheets
make up the work in process subsidiary
ledger. Job No. 71 is shown below.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Materials
o
A summary of the materials requisitions is
used as a basis for the journal entry recording
the materials used for the month.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Factory Labor
o When employees report for work, they may
use clock cards, in-and-out cards, or electronic
badges to clock in. When employees work on
an individual job, they use time tickets.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
FACTORY LABOR
Factory Labor
o
A summary of the time tickets is used as the
basis for the journal entry recording direct
labor for the month.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Factory Overhead Cost
o
Factory overhead costs come from a variety of
sources including the following:
 Indirect materials comes from a summary of
materials requisitions.
 Indirect labor comes from the salaries of
production supervisors and the wages of other
employees such as janitors.
 Factory power comes with the utility bills.
 Factory depreciation comes from Accounting
Department data.
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Factory Overhead Cost
o Legend Guitars incurred $4,600 of overhead in
December. The $500 of materials consisted of
$200 of glue and $300 of sandpaper.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Allocating Factory Overhead
o The process by which factory overhead or
other costs are assigned to a cost object, such
as a job, is called cost allocation.
o The factory overhead costs are allocated to
jobs using a common measure related to each
job. This measure is called an activity base,
allocation base, or activity driver.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Predetermined Factory Overhead Rate
o
Factory overhead costs are normally allocated
or applied to jobs using a predetermined
factory overhead rate. The predetermined
factory overhead rate is computed as follows:
Predetermined Factory
=
Overhead Rate
Estimated Total
Factory Overhead Costs
Estimated Activity Base
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Predetermined Factory Overhead Rate
o Legend Guitars estimates the total factory
overhead cost as $50,000 for the year and the
activity base as 10,000 direct labor hours.
Predetermined
Factory
=
Overhead Rate
Predetermined
Factory
=
Overhead Rate
Estimated Total Factory Overhead Costs
Estimated Activity Base
$50,000
10,000 direct labor hours
Predetermined
Factory
= $5 per direct labor hour
Overhead Rate
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
APPLYING FACTORY
OVERHEAD
Applying Factory Overhead
o Using a factory overhead rate of $5 per direct
labor hour, $4,250 of factory overhead is
applied as follows:
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Applying Factory Overhead
A Closer Look at Job 72
o On December 26, 2014, S. Andrews spent eight
hours on Job 72 at an hourly rate of $15 for a
cost of $120 (8 hrs. x $15). A total of 500 hours
was spent by all employees who worked on
Job 72 during December, for a total cost of
$7,500.
(continued)
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A CLOSER LOOK AT
JOB 72
December Job
72 (500 hours)
for a total cost
of $7,500
to Job Cost Sheet
(continued)
A CLOSER LOOK
AT JOB 72
from
materials
from time
requisitions
500
tickets
hrs. x
$5
Applying Factory Overhead
o The factory overhead account is:
 Increased (debited) for the actual overhead costs
incurred.
 Decreased (credited) for the applied overhead.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Applying Factory Overhead
o
If the applied overhead is less than the actual
overhead incurred, the debit balance is called
underapplied factory overhead or
underabsorbed factory overhead.
o
If the applied overhead is more than the actual
overhead incurred, the credit balance is
called overapplied factory overhead or
overabsorbed factory overhead.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Applying Factory Overhead
o The factory overhead account for Legend
Guitars shown below illustrates both
underapplied and overapplied factory
overhead.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Disposal of Factory Overhead Balance
o
If there is an ending debit balance
(underapplied overhead) in the factory
overhead account, it is disposed of by the
entry shown below.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Disposal of Factory Overhead Balance
o If there is an ending credit balance
(overapplied overhead) in the factory
overhead account, it is disposed of by the
entry shown below.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Disposal of Factory Overhead Balance
o The journal entry to dispose of Legend Guitars’
December 31, 2014, underapplied overhead
balance of $150 is as follows:
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Work in Process
o During the period, Work in Process is
increased (debited) for the following:
 Direct materials cost
 Direct labor cost
 Applied factory overhead cost
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
WORK IN PROCESS
Work in Process
o During December, Job 71 was completed.
Upon completion, the product costs are totaled.
The job’s total cost of $10,250, divided by the
20 Jazz Series guitars produced as Job 71,
provides a unit cost of $512.50. Job 71 is
transferred from production to finished goods
inventory by the following entry:
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Finished Goods
o
The finished goods account is a controlling
account for the subsidiary finished goods
ledger, or stock ledger.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Sales and Cost of Goods Sold
o During December, Legend Guitars sold 40 Jazz
Series guitars for $850 each, generating total
sales of $34,000 ($850 x 40). Exhibit 7
(previous slide) indicates that the cost per
guitar sold was $500 or a total cost of $20,000
($500 x 40).
o Two entries are required, one for the sale and
one to record the cost of goods sold and to
reduce the finished goods account.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Sales and Cost of Goods Sold
Period Costs
o
Period costs are used in generating revenue
during the current period, but are not involved
in the manufacturing process. They are
recorded as either selling or administrative
expenses.
o
Selling expenses are incurred in marketing
and delivering the product.
o
Administrative expenses are incurred in
managing the company, but are not related to
the manufacturing or selling functions.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Summary of Cost Flows for Legend Guitars
Costs & Expenses
Product Costs
Balance Sheet
Materials
Purchases
Materials
Inventory
Direct
Labor
Factory
Overhead
Work in
Process
Inventory
Finished
Goods
Inventory
Cost of goods
manufactured
SUMMARY OF COST
FLOWS FOR
LEGEND GUITARS
Materials
Dec. 1 6,500
(a)
10,500
Materials Ledger
No. 8 Wood—Maple
Dec. 1
6,000
(a)
10,500
Factory Overhead
Dec. 1
Work in Process
200
Dec. 1
3,000
Credit Accounts
Payable, $10,500
Glue
Dec. 1
200
Sandpaper
Dec. 1
300
a. Materials purchased
during December
SUMMARY OF COST
FLOWS FOR
LEGEND GUITARS
Materials
Dec. 1 6,500
(a)
10,500
(b)
Factory Overhead
13,000
Materials Ledger
No. 8 Wood—Maple
Dec. 1
6,000
(b)
13,000
(a)
10,500
Dec. 1
Work in Process
200
Dec. 1
(b)
3,000
13,000
Job Cost Sheets
20 Units of Jazz Series Guitars, Job 71
Dec. 1
3,000
Glue
Dec. 1
200
Sandpaper
Dec. 1
300
60 Units of American Series Guitars, Job 72
b. Materials requisitioned to jobs
(continued)
SUMMARY OF COST
FLOWS FOR
LEGEND GUITARS
Materials
Dec. 1 6,500
(a)
10,500
(b)
Factory Overhead
13,000
Materials Ledger
No. 8 Wood—Maple
Dec. 1
6,000
(b)
13,000
(a)
10,500
Dec. 1
Work in Process
200
Dec. 1
(b)
3,000
13,000
Job Cost Sheets
20 Units of Jazz Series Guitars, Job 71
Dec. 1
3,000
(b) Direct materials
2,000
Glue
Dec. 1
200
Sandpaper
Dec. 1
300
60 Units of American Series Guitars, Job 72
(b) Direct materials
11,000
b. Update job cost sheets
(continued)
SUMMARY OF COST
FLOWS FOR
LEGEND GUITARS
Materials
Dec. 1 6,500
(a)
10,500
(b)
Factory Overhead
13,000
Materials Ledger
No. 8 Wood—Maple
Dec. 1
6,000
(b)
13,000
(a)
10,500
Dec. 1
Work in Process
200
Dec. 1
(b)
(c)
3,000
13,000
11,000
Credit Wages
Payable, $11,000
Glue
Dec. 1
200
Sandpaper
Dec. 1
300
c. Factory labor used in
production of jobs
(continued)
SUMMARY OF COST
FLOWS FOR
LEGEND GUITARS
Materials
Dec. 1 6,500
(a)
10,500
(b)
Factory Overhead
13,000
Materials Ledger
No. 8 Wood—Maple
Dec. 1
6,000
(b)
13,000
(a)
10,500
Dec. 1
Work in Process
200
Dec. 1
(b)
(c)
3,000
13,000
11,000
Job Cost Sheets
20 Units of Jazz Series Guitars, Job 71
Dec. 1
3,000
(b) Direct materials
2,000
(c) Direct labor
3,500
Glue
Dec. 1
200
60 Units of American Series Guitars, Job 72
(b) Direct materials
11,000
(c) Direct labor
7,500
Sandpaper
Dec. 1
300
c. Update the job cost sheets
(continued)
SUMMARY OF COST
FLOWS FOR
LEGEND GUITARS
Materials
Dec. 1 6,500
(a)
10,500
(b)
(d)
Factory Overhead
13,000
500
(d)
500
Dec. 1
Work in Process
200
Dec. 1
(b)
(c)
3,000
13,000
11,000
Materials Ledger
No. 8 Wood—Maple
Dec. 1
6,000
(b)
13,000
(a)
10,500
Glue
Dec. 1
200
Sandpaper
Dec. 1
300
d. Factory overhead
incurred in production
(indirect materials
used, $500)
(continued)
SUMMARY OF COST
FLOWS FOR
LEGEND GUITARS
Materials
Dec. 1 6,500
(a)
10,500
(b)
(d)
Factory Overhead
13,000
500
Materials Ledger
No. 8 Wood—Maple
Dec. 1
6,000
(b)
13,000
(a)
10,500
Glue
Dec. 1
200
Sandpaper
Dec. 1
(d)
(d)
500
900
Dec. 1
Work in Process
200
Dec. 1
(b)
(c)
3,000
13,000
11,000
Credit Utilities Payable, $900
d. Factory overhead
incurred in production
(utility bill, $900)
300
(continued)
SUMMARY OF COST
FLOWS FOR
LEGEND GUITARS
Materials
Dec. 1 6,500
(a)
10,500
(b)
(d)
Factory Overhead
13,000
500
Materials Ledger
No. 8 Wood—Maple
Dec. 1
6,000
(b)
13,000
(a)
200
Sandpaper
Dec. 1
500
900
1,200
Dec. 1
200
Dec. 1
(b)
(c)
3,000
13,000
11,000
Credit Accumulated
Depreciation, $1,200
10,500
Glue
Dec. 1
(d)
(d)
(d)
Work in Process
300
d. Factory overhead
incurred in production
(depreciation on factory
machinery, $1,200)
(continued)
SUMMARY OF COST
FLOWS FOR
LEGEND GUITARS
Materials
Dec. 1 6,500
(a)
10,500
(b)
(d)
Factory Overhead
13,000
500
Materials Ledger
No. 8 Wood—Maple
Dec. 1
6,000
(b)
13,000
(a)
200
Sandpaper
Dec. 1
500
900
1,200
2,000
Dec. 1
200
Dec. 1
(b)
(c)
3,000
13,000
11,000
Credit Wages
Payable, $2,000
10,500
Glue
Dec. 1
(d)
(d)
(d)
(d)
Work in Process
d. Factory overhead
incurred in production
(indirect labor, $2,000)
300
(continued)
SUMMARY OF COST
FLOWS FOR
LEGEND GUITARS
e. Factory overhead is
applied to jobs according
to the predetermined
overhead rate
(continued)
SUMMARY OF COST
FLOWS FOR
LEGEND GUITARS
Materials
Dec. 1 6,500
(a)
10,500
(b)
(d)
Factory Overhead
13,000
500
Materials Ledger
No. 8 Wood—Maple
Dec. 1
6,000 (b)
13,000
(a)
10,500
Glue
Dec. 1
200
(d)
300
(d)
500 Dec. 1
900 (e)
1,200
2,000
200
4,250
Dec. 1
(b)
(c)
(e)
3,000
13,000
11,000
4,250
Job Cost Sheets
20 Units of Jazz Series Guitars, Job 71
Dec. 1
3,000
(b) Direct materials
2,000
(c) Direct labor
3,500
(e) Factory overhead
1,750
200
60 Units of American Series Guitars, Job 72
(b) Direct materials
11,000
(c) Direct labor
7,500
(e) Factory overhead
2,500
Sandpaper
Dec. 1
(d)
(d)
(d)
(d)
Work in Process
300
(continued)
SUMMARY OF COST
FLOWS FOR
LEGEND GUITARS
Materials
Dec. 1 6,500
(a)
10,500
(b)
(d)
Factory Overhead
13,000
500
Materials Ledger
No. 8 Wood—Maple
Dec. 1
6,000 (b)
13,000
(a)
10,500
(d)
(d)
(d)
(d)
500 Dec. 1
900 (e)
1,200 (f)
2,000
Work in Process
200
4,250
150
Dec. 1
(b)
(c)
(e)
3,000
13,000
11,000
4,250
Debit Cost of
Goods Sold, $150
Glue
Dec. 1
200
(d)
200
Sandpaper
Dec. 1
300
(d)
300
f. Closed underapplied factory
overhead to cost of goods sold
(continued)
SUMMARY OF COST
FLOWS FOR
LEGEND GUITARS
Materials
Dec. 1 6,500
(a)
10,500
(b)
(d)
Factory Overhead
13,000
500
Materials Ledger
No. 8 Wood—Maple
Dec. 1
6,000 (b)
13,000
(a)
10,500
Glue
Dec. 1
200
(d)
200
Sandpaper
Dec. 1
300
(d)
300
(d)
(d)
(d)
(d)
500 Dec. 1
900 (e)
1,200 (f)
2,000
200
4,250
150
Work in Process
10,250
Dec. 1
3,000 (g)
(b)
(c)
(e)
13,000
11,000
4,250
Job Cost Sheets
20 Units of Jazz Series Guitars, Job 71
Dec. 1
3,000
(b) Direct materials
2,000
(c) Direct labor
3,500
(d) Factory overhead
1,750
10,250
g. Job 71 completed in December
(continued)
SUMMARY OF COST
FLOWS FOR
LEGEND GUITARS
Materials
Dec. 1 6,500
(a)
10,500
(b)
(d)
Factory Overhead
13,000
500
Materials Ledger
No. 8 Wood—Maple
Dec. 1
6,000 (b)
13,000
(a)
(d)
(d)
(d)
(d)
500 Dec. 1
900 (e)
1,200 (f)
2,000
200
4,250
150
Work in Process
10,250
Dec. 1
3,000 (g)
(b)
(c)
(e)
13,000
11,000
4,250
Finished Goods
Dec. 1
(g)
20,000
10,250
10,500
Glue
Dec. 1
200
(d)
200
Finished Goods Ledger
Jazz Series Guitars
Dec. 1
(g)
Sandpaper
Dec. 1
300
(d)
20,000
10,250
300
(continued)
SUMMARY OF COST
FLOWS FOR
LEGEND GUITARS
Work in Process
10,250
Dec. 1
3,000 (g)
(b)
(c)
(e)
(f)
150
13,000
11,000
4,250
Finished Goods
Dec. 1
(g)
20,000
10,250
Finished Goods Ledger
Jazz Series Guitars
Dec. 1
(g)
Cost of Goods Sold
20,000
10,250
h. Sold 40 units of Jazz
Series guitars on account
Accounts Receivable XXX
Sales
XXX
(continued)
SUMMARY OF COST
FLOWS FOR
LEGEND GUITARS
Work in Process
10,250
Dec. 1
3,000 (g)
(b)
(c)
(e)
13,000
11,000
4,250
Cost of Goods Sold
(f)
(i)
150
20,000
Finished Goods
Dec. 1
(g)
20,000 (i)
10,250
20,000
i. Cost of 40 units of Jazz
Series guitars sold
Finished Goods Ledger
Jazz Series Guitars
Dec. 1
(g)
20,000 (i)
10,250
20,000
(continued)
SUMMARY OF COST
FLOWS FOR
LEGEND GUITARS
SUMMARY OF COST
FLOWS FOR
LEGEND GUITARS
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Job Order Costing for Decision Making
o
A job order cost accounting system
accumulates and records product costs by
jobs. The resulting total and unit product costs
can be compared to similar jobs, compared
over time, or compared to expected costs.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
JOB ORDER
COSTING FOR
DECISION MAKING
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Job Order for Professional Services
o
Since the “product” of a service business is
service, management’s focus is on direct labor
and overhead costs.
o
A job cost sheet is used to accumulate the
costs for each client’s job. When the job is
completed and the client billed, the costs are
transferred to a cost of services account.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
JOB ORDER FOR
PROFESSIONAL
SERVICES
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.